Trolls, Wizards, and the Pitfalls of Patenting

2 May 2012

Patents are back in the news. In the past few weeks alone, Microsoft bought AOL’s patent portfolio for $1 billion, then resold much of it to Facebook for $550 million. Twitter pledged to use its patents only defensively, and to give its employee-inventors a say in the company’s future patent litigation strategy. Controversial trials, appeals, rulings, and awards continue–prompting the Wall Street Journal to publish Andy Kessler’s call for curtailing the rights of non-practicing entities (NPEs), also known affectionately as “trolls.”

Meanwhile, the provisions of last year’s America Invents Act (AIA)–heralded in many quarters (mistakenly, in my view) as the most significant revision to the patent landscape in almost sixty years–continue to alter the terrain in numerous ways.

This interest is hardly surprising. The patent system is probably the single most pro-growth feature of our regulatory systems. In the absence of some sort of mechanism for motivating and rewarding both innovation and the dissemination of new discoveries, progress would slow, and many of our most important technology industries would wither. It is hardly coincidental that our last patent revolution–a combination of Congressional and judicial actions between 1980 and 1984 whose changes I consider far more significant than those in the AIA–immediately preceded an era of both unrivaled technological advancement and the rapid commercialization of those advances.

As I have written in The Secret Circuit and elsewhere though, the reforms of the early 1980s have run their course. Their combined intent and effect turned patents from something of a disfavored joke into an important component of business strategy. They spurred industry/academia collaboration; rewrote the relationship among branded drug companies, their generic competitors, and the FDA; standardized patent law; and announced that the patent system was open to the then-new industries emerging around biology and computation.

That last point is responsible for much of the current commotion. The once-questionable legitimacy of “soft patents” covering software, the Internet, and business models dissipated slowly throughout the 1980s and 90s. By 1998, however, the Court of Appeals for the Federal Circuit (CAFC) had ruled that all three were acceptable. The floodgates opened just in time for the Internet bubble.

The first major wave of soft patents came from those outside the bubble. Even when times are flush, academic prestige and venture funds flow to those aligned with conventional wisdom. Many researchers, inventors, and entrepreneurs pushing unconventional approaches found themselves frozen out of the excitement–and the riches. Some of them turned to the patent system as ways to stake their claims. Patenting provided them with a way to bide their time. As conventional thinkers–only some of whom were right–soared to fame and fortune, their less conventional peers–some of whom were also right–positioned themselves to benefit when conventional wisdom shifted in their direction. When the bubble burst, a much larger wave of once-insider researchers, inventors, and entrepreneurs suddenly found themselves on the outside. They too turned to the patent system. Taken together, the late 1990s and early 2000s witnessed a wave of soft patent applications outlining ideas for Internet business development significantly different from those actually in play.

Of course, any game good enough to attract legitimate innovators also draws its share of charlatans. Because patent examiners typically review applications in light of existing patents, new industries pose particularly challenging examination problems. Prior to the late 1990s, few innovators in computing, algorithms, or business applied for patents. As a result, little if any of the relevant “prior art” was in the patent literature. That challenge created an opening through which bad work could flow. Many applications of the time simply regurgitated well-known results, hoping that the examiners would not find old conference presentations or journal articles. Bad applications began to swamp the applications from genuine unconventional innovators.

Big companies began to tremble. Bad patents granted on bad applications threatened to undermine the entire industry. The majors had to get into the game. Claiming to play a purely defensive game–as Twitter now pledges–they too applied to patent everything in sight, from the long known to the truly new.

Meanwhile, the PTO put on the brakes. Large parts of the patenting world never really accepted the legitimacy of soft patents. These folks spent a decade trying to convince Congress, or more often the Supreme Court, to end them. In 2010, the Supremes turned them down; Congress followed suit in 2011. Subject to a few rules and restrictions that we are still trying to digest, soft patents are real. The PTO began to break its logjam. Numerous patents relating to basic Internet business methods and heuristic search algorithms have issued since, setting the stage for some epic battles.

The battle lines are shaping up in predictable ways. Kessler’s article, for example, asserts a line quite common among major Internet players: he suggests tilting the playing field in favor of the incumbent companies whose products and services created the Internet, and away from non-practicing “trolls” who would hold the Internet hostage while seeking a rich ransom.

The argument appears enticing–until we examine the facts. Yes, there are certainly cases in which a bad patent can threaten to undermine a good company. And in all such circumstances, we should hope that the company prevails while lamenting the American litigation system’s inability to discipline those who file frivolous lawsuits. But there are also cases in which those same large companies decided to reward and promote the conventional wisdom while shunning a less-conventional idea that turned out to be right. In those cases, the patent suit pits rich investors, incumbent players, and engineers who made the wrong call a decade ago against poorer patentees who made the right technical call.

Finally, there is yet another set of important cases emerging: Some of the big incumbent players who filed scattershot patent applications for the finest of defensive reasons now hold some pretty bad patents. When they discover that their competitors are infringing their bad patents, they are rarely bashful about converting them to offensive weapons.

The bottom line is that the current wave of patent litigation requires a detailed scorecard, not just knowledge of the players. Some non-practicing entities are wicked trolls seeking to hold the Internet hostage. Others are grand wizards whose sage counsel would have helped us long ago, had we only been willing to accept it. Some incumbent players are fending off attacks from trolls. Others are trying to leverage bad patents into technological monopolies. There can–and should–be no general favorite.

The patent system exists to promote knowledge. The only way to fulfill that goal is to reward those whose contributions are genuine. We–whether indirectly as consumers or directly as infringing incumbents–should compensate innovators holding good patents happily. And we should not flinch from rewarding them as greatly as we would have had we funded them a decade ago. At the same time, we should only reward those whose contributions are genuine. Kessler’s proposal–denying small players the rights that we grant to large ones–simply helps entrenched incumbents remain entrenched. It does nothing to promote the “creative destruction” that truly rewards innovation.

Those of us who work with patents, and in patent litigation, should stick to a case-by-case analysis, rather than adopting a view that favors large incumbents over small inventors. Good patents should win, bad patents should lose, regardless of the character of the patentee. Just think of it as the patent-specific manifestation of equal protection.